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Regulations Update Hybrid Defined Benefit Plan Rules

On
Monday, the IRS released final and proposed regulations
providing guidance on so-called hybrid defined benefit pension
plans (T.D. 9693 and REG-111839-13). The regulations deal with
changes made by the Pension Protection Act of 2006, P.L.
109-280, and the Worker, Retiree, and Employer Recovery Act of
2008, P.L. 110-458. The Pension Protection Act modified the
Sec. 411(a) minimum vesting standards and the Sec. 411(b)
accrual requirements.

A hybrid defined benefit pension
plan is generally a defined benefit plan under the terms of
which the accumulated benefit of a participant is expressed as
the balance of a hypothetical account maintained for the
participant or as the current value of the accumulated
percentage of the participant’s final average compensation (or
is a plan that uses a formula that has an effect similar to
this).

These regulations address issues that were not
covered in final regulations issued in 2010 (T.D. 9505) and
make certain other changes to those earlier rules. One change
is to permit the 133 1/3% rule of Sec. 411(b)(1)(B) for
defined benefit plans that adjust benefits using a variable
rate that could be negative to be applied at an earlier date
than originally proposed, either for plan years that begin on
or after Jan. 1, 2012, or an earlier date elected by the
taxpayer.

Another change is to the age discrimination
rules for plan years that begin on or after Jan. 1, 2016. If
the annual benefit payable before normal retirement age is
greater for a participant than the annual benefit under the
corresponding form of benefit for any similarly situated,
older individual who is or could be a participant and who is
currently at or before normal retirement age, then that excess
is not part of the subsidized portion of an early retirement
benefit and, accordingly, is not disregarded for age
discrimination purposes.

Another significant change
from the 2010 regulations is to the interest crediting rates
that are permitted. Although these regulations continue to
specify which interest crediting rates satisfy the
market-rate-of-return requirement, the list of rates has been
expanded to include certain additional rates not permitted
under the 2010 rules. So the list of permitted rates can be
further expanded in the future, the IRS may publish guidance
increasing the interest crediting rates (e.g., by increasing
the maximum permitted margin that can be added to one or more
of the safe-harbor rates, increasing the maximum permitted
fixed rate, or increasing a maximum permitted annual floor)
and to issue other rules that are discussed in the
preamble.

T.D. 9693 generally applies to plan years that
begin on or after Jan. 1, 2016.

Related proposed
regulations issued simultaneously concern the rules under
which a hybrid plan is treated as failing to satisfy Sec.
411(b)(1)(H) (which prohibits the rate of an employee’s
benefit accrual from being reduced because of the attainment
of any age) if the terms of the plan provide any interest
credit (or an equivalent amount) for any plan year at a rate
that is in excess of a market rate of return. A plan does not
satisfy Sec. 411 if an amendment to the plan decreases a
participant’s accrued benefit. For this purpose, a plan
amendment that has the effect of eliminating or reducing an
early retirement benefit or a retirement-type subsidy or
eliminating an optional form of benefit for benefits
attributable to service before the amendment is treated as
reducing accrued benefits.

The proposed rules
recognize that there is a conflict between the
market-rate-of-return rules and the Sec. 411(d)(6)
anti-cutback rules and would permit a plan with a noncompliant
interest crediting rate to be amended with respect to benefits
that have already accrued so that its interest crediting rate
complies with the market rate of return rules. The proposed
rules also request comments on these issues. Comments must be
received by Dec. 19, 2014. A public hearing is scheduled for
Jan. 9, 2015.

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